JCPenney: Fire Ron Johnson

This isn’t a turnaround — it’s a tailspin

Monday’s 13% slide in JCPenney (NYSE:JCP) certainly made some headlines. But in case you haven’t been paying attention, this is hardly a new trend — JCP stock is down nearly 60% from its February peak and is down about 50% from its pre-recession peak.

For many stocks, the same-ol’ same-ol’ would be merely disappointing or frustrating. With JCP, it’s infuriating because investors were sold on a Hail Mary of a turnaround that never happened.

It’s time to fire Ron Johnson and give up on this failed JCPenney “turnaround.”

The Ron Johnson Hype Machine

It was a great shtick when JCP announced Johnson would take over in June 2011.

Bill Ackman of Pershing Square and Vornado Realty Trust (NYSE:VNO) heavyweight Steven Roth, who held a collective 28.8% stake in JCPenney, shook up the company and lobbied for Ron Johnson to take the helm. He was a savior, an Apple genius who could reinvent the company once and for all.

Then in the months leading up to his formal takeover, everyone was falling over themselves with headlines like “5 Reasons J.C. Penney’s Ron Johnson will Reinvent Retail.” Ron Johnson planned to kill a promotion-driven, coupon-frenzied model and replace it with a new customer experience that would change the world. He set his sights on a Target (NYSE:TGT) model with quality brands on the cheap, married with the high-end customer service of chains like Macy’s (NYSE:M) and Nordstrom (NYSE:JWN) and wrapped up in a sexy, Apple-like package.

This guy was the real deal, ready to reinvent JCP and send it to new heights … right?

Wrong.

Another Tired Retail Flop

For starters, let’s get this up front — that “investment” was just funny money. Ron Johnson got $53.3 million just for showing up for his first few weeks of work — so let’s not act like he was putting any real skin in the game there.

But more important than any personal accounting tricks, Johnson came in with a grand vision of pulling the plug on coupons. That strategy blew up in his face, marked by three consecutive quarters of same-store sales drops 17% or more. The most recent was an apocalyptic 27% drop year-over-year — and the Wall Street Journal points out the headline tally of $2.7 billion in sales declines is equivalent to the entire annual revenue of Saks (NYSE:SKS).

Revenue and earnings per share have slumped for five consecutive quarters — spanning the entire tenure of Ron Johnson as CEO, and then some.

In May, Howard Davidowitz of Davidowitz & Associates said it best when he told Aaron Task of Yahoo! Finance that Ron Johnson has ” caused incalculable damage. The customers are everything. They don’t know what the hell he’s doing.” Davidowitz went on to say, “J.C. Penney didn’t need a revolution, it needed an evolution. You can’t take an old line company that’s been operating the same way a very long time and throw everything out the window and say ‘now we’ve reinvented the company.'”

And after all that? Coupons — or “gifts” or whatever you want to call them — are back.

So the much-anticipated retail turnaround has not happened. At all. Instead, investors have a costly mistake that has to be undone.

Hardly a dream team there. So it’s time to take things a step further and cut off the head of this ugly beast and hit reset on JCP without Ron Johnson.

Don’t Buy Under Any Circumstances

The ugliness has come home to roost. In its most recent quarterly report, JCP reported a net loss of $203 million, far worse than expectations, and same-store sales fell 26% while overall sales of $2.92 billion fell far short of the $3.23 billion forecast.

It’s the latest in a long line of ugly earnings, and shares continue to suffer as a result.

Wall Street is decidedly bearish on JCP. Credit Suisse (NYSE:CS) just cut JCPenney stock to “underperform” with a price target of $15. That’s another 17% down from here. BMO Capital Markets cut its price target to $18, almost exactly where shares landed after Monday’s flop. But Bank of America (NYSE:BAC), ever the optimist, slashed its outlook to $19. That’s at least north of current pricing, though not by much.

Considering the Street’s ridiculous number of buy and hold ratings and the rarity of a sell recommendation, you have to be pretty darn bad to win this kind of negative attention.

So investors should not buy, under any circumstances.

And if you own already? Well, maybe you can band together with other pissed-off JCP stockholders and try to kick Ron Johnson out of his corner office. Otherwise, your only hope is to wait for a dead-cat bounce and hit the eject button as soon as possible.

This stock isn’t turning around any time in 2013. And frankly, Ron Johnson should pay for that. His naïve notions of reinvention have cost an already troubled retail stock a full year of drama and big losses — and in this kind of environment for brick-and-mortar department stores, that’s inexcusable.

At a Glance

Ron Johnson's naïve notions of reinvention have cost an already troubled retail stock a full year of drama and big losses -- and in this kind of environment for brick-and-mortar department stores, that’s inexcusable.